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Sunday, April 18, 2010

Goldman Sachs and the SEC

Dionysusal asked for a post on this subject. I'm still not fully ready to resume my normal posting schedule, but I'll put in a bit on this.

Basically, Goldman Sachs hired a hedge fund to make a mortgage CDO for them. The hedge fund was run by now-former Treasury secretary Paulson.

While selling the mortgage CDO to clients, Paulson's firm was simultaneously short-selling the same CDO. The CDO was created specifically to facilitate short-selling mortgages as the market collapsed.

Goldman Sachs told their customers that Paulson's firm was long the CDO when they were really short it. The customer bought the CDO and then lost money when the mortgage market imploded.

Now, the SEC is pursuing civil fraud charges against Goldman Sachs.

It seems there's a huge public outcry against Goldman Sachs due to the abuses of the bubble/bust/bailout. This is a way to publicly shame them.

Ultimately, it doesn't make much difference. Goldman Sachs makes most of its profits borrowing at the Fed Funds Rate and buying assets. The customers only make it easier to make extra money. Quite frankly, Goldman Sachs doesn't need customers when its main customer is the government.

In the worst-case, Goldman Sachs might pay a fine of $1B. That's still negligible compared to the total bailout money they receive every year.

One potential defense for Goldman Sachs is "Everyone was doing it. We're unfairly singled out."

Goldman Sachs receives massive direct and indirect bailouts every year. Insiders borrow at the Fed Funds Rate while true inflation is much higher. That's a massive indirect State subsidy. Goldman Sachs received TARP money directly. The bailout of AIG was an indirect bailout of Goldman Sachs.

The SEC enforcement action against Goldman Sachs is one big evil fnord. The worst-case fine is much less than the bailout money Goldman Sachs receives every year. These cases are typically settled where the defendant "neither admits nor denies wrongdoing". The SEC is taking a hard-line approach to give the public appearance of accountability.


Anonymous said...

This is backwards.

Paulson's hedge fund hired GS to create the CDOs. The hedge fund wanted to short mortgage CDOs so GS sold the long side to its own retail clients.

dionysusal said...

So, just as I thought-- they're gonna get off scot-free or just a slap on the wrist at worst. What a load of barnacles. We need an agorist revolution pronto.

Anonymous said...

Also, this is John Paulson of Paulson & Co, not former Treasury Secretary Hank Paulson.

FSK said...

I didn't research this carefully enough. Sorry about that. This was my first serious post after recovering from being hospitalized.

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